Week in Review

June 10, 2019

Global Roundup

Britain's PM steps down as Conservative leader. British Prime Minister Theresa May stepped down as leader of the governing Conservatives on June 7, officially triggering a contest to replace her that could see her party embrace a tougher stance on Brexit. (Reuters)

Trump administration strips India of special trade status. The Trump administration announced on June 7 that it was stripping India of a special status that exempts billions of dollars of its products from American tariffs, part of a deepening clash over India’s protections for its market. (New York Times)

World trade is heading for its worst year since the crisis, ING says. ING analysts calculated the effect of U.S. policy on world trade using an average drawn from three possible scenarios, and concluded that trade will grow no more than 0.3% in 2019, the worst year since the “great collapse of trade” in 2009. (CNBC)

Four million Venezuelans have fled crisis: U.N. Four million Venezuelan refugees and migrants have fled an economic and political crisis in their homeland, all but 700,000 of them since the end of 2015, U.N. aid agencies said on June 7. (Reuters)

Brazil: EU and Mercosur “on the verge of signing” trade deal. Officials from the two blocs hope to close the deal during high-level talks in the last week of June. (Politico)

Cuba expects major economic damage from Trump measures. Drivers of classic cars, restaurateurs, tour guides and owners of bed-and-breakfasts are all saying the Trump administration’s new restrictions on U.S. travel to Cuba will be a severe blow to their businesses. (Business Mirror)

Global growth continues to weaken, World Bank report confirms. After the IMF and the OECD, the World Bank has also cut its 2019 growth forecasts. Uncertainties over trade and investment are at the root of this slowdown, which is also affecting the eurozone. (EurActiv)

Iran partially exits the nuclear deal. Is war on the horizon? President Trump’s most recent sanctions and deployment of an aircraft carrier to the Persian Gulf has raised fears about another U.S. war in the Middle-East. Iran’s decision to cease compliance with key parts of the Joint Comprehensive Plan of Action (JCPOA) intensifies anxieties. (Global Risk Insights)

U.S. tariffs could directly Affect 1 in 5 Mexican corporates. The imposition of broad-based tariffs on U.S. imports of Mexican goods could have a direct negative revenue effect on 20% of Fitch Ratings' Mexican-rated corporates. However, depending on the duration and level of tariffs levied, there would also likely be indirect effects on Mexican companies linked to the broader macroeconomic repercussions of heightened trade tensions. (Fitch)

China says its Russia partnership is designed to blunt U.S. “strategic edge.” China and Russia are being pushed into a closer geopolitical partnership by President Trump's foreign policy decisions, a diplomat in Beijing argued June 6. (Washington Examiner)

“No way to stop it.” Millions of pigs culled across Asia as swine fever spreads. Southeast Asia is battling to contain the spread of highly contagious African swine fever, known as “pig Ebola,” which has already led to the culling of millions of pigs in China and Vietnam. (The Guardian)

Manufacturers are considering leaving China. But it isn't all because of the trade war. The U.S. has levied 25% fees on up to $250 billion worth of goods imported from China, forcing manufacturers to either swallow the additional costs or pass the difference onto consumers. But reports suggest that some companies are choosing a third option: shifting production outside of China. (Fortune)

Two Reasons That Tariffs Work and Two Reasons They Don’t

Chris Kuehl, Ph.D.

Before we get into what makes a given tariff effective or ineffective, we need to point out that there have always been two purposes as far as tariffs are concerned. They have been imposed by almost every nation on earth and have been used for hundreds of years.

The most common use is based on economic consideration, but there have long been tariffs used for political aims. A classic example of the latter is the one threatened by President Donald Trump against Mexico. There was no economic demand made of Mexico—rather the tariff was a threat to punish the Mexican government if it did not adhere to U.S. demands regarding immigration. Over the years, the politically motivated tariff has a very poor record of success. The economic motivation for a tariff has a mixed record, but under the right conditions, there is the opportunity for the desired outcome.

Generally speaking, tariffs (and other trade restrictions) are imposed for four reasons. The most common is the “infant industry” motivation. Countries just developing the capacity to produce something will seek to limit the importation of a competitive product so the domestic producers have time to develop and get ready to compete on a global scale. This kind of tariff has been used extensively by developing nations seeking to compete against established companies in the U.S., Europe or Japan. China erected many such barriers as it sought to develop its native industries. Theoretically, a nation lowers or removes that tariff once their domestic sector matures. In reality very few do unless under some pressure to do so.

A second rationale is essentially an attempt to “level the playing field.” Developed nations frequently impose restrictions and tariffs on nations that compete on the basis of their very low production costs. Developing nations generally have very low-paid labor, very loose environmental and labor rules and other advantages that give them a competitive edge. The developed nations seek to blunt that edge with trade restrictions and tariffs, but this comes at a cost to the consumer in the developed nation as they will be denied access to lower-priced goods.

A third rationale is basic protection. There are industries considered important for many reasons. The government will seek to protect them in a variety of ways. There will be trade restrictions and tariffs, but there will also be a whole host of additional protections that range from outright subsidies to government buyouts and special tax considerations. Japan could save billions each year if it bought rice from other nations. China and India are number one and two—Japan is a distant number eight. Japan considers rice a national security issue and refuses to be dependent on any other nation. The U.S. has sought to protect its high-tech sector and anything that relates to the military. This designation gets stretched pretty far at times. In addition to national security, there is a desire to protect industries that provide a large part of the GDP and employment. The U.S. has long been protective of the auto sector and has tried to insulate the farm community with a variety of subsidies and tariffs on imported food.

Protection of innovation is another rationale—somewhat similar to the infant industry argument, but one that is more commonly leveled by the developed nations. The U.S. (as well as Europe and Japan) leads the world in terms of research and development. This is what drives the bulk of innovation in the U.S. economy. The fear is other nations will simply steal or otherwise acquire that technological know-how without spending billions of dollars over a period of years. The U.S. wants to protect its research investment from exploitation, but given the speed at which knowledge travels, that is a very hard thing to accomplish.

Over time, tariffs have been pretty effective at accomplishing the first two goals, but much less so when the latter two goals are examined. The key to any successful tariff is certainty. The tax needs to be in place on a near-permanent basis so that domestic producers have the confidence to invest. The U.S. has been notorious when it comes to manipulating tariffs. Most fail to last—affected by changes in political priorities. Remember that the U.S. economy is first and foremost geared to the consumer. The pressure is great to ensure that consumers are able to live their chosen lifestyle and at a very low cost. Given that consumers pay these tariffs, it is always tempting to remove them.

SMEs Struggling With Late Payments

Small- and medium-sized enterprises (SMEs) across the globe are feeling the economic squeeze from late payments. There are many movements, small and large, around the world to remedy this issue. Australia, Canada, South Africa and the U.K. are among those fighting for faster payments to SMEs and suppliers, especially after the fall of Carillion, the resignation of U.K. Prime Minister Theresa May and the forthcoming U.K. exit from the European Union.

Members of Parliament are also calling for businesses to step up their game and join the Prompt Payment Code (PPC). Rachel Reeves, MP, chair of the Business, Energy and Industrial Strategy Committee, reached out to grocery retailers to find out why six of the 12 under the Groceries Supply Code of Practice have not signed the PPC.

The U.K.’s Federation of Small Businesses (FSB) has called on May to use her final days as prime minister to “push through the late payments reforms package.” Four in five small businesses are impacted by late payments, and “[t]hese practices carried out by big businesses toward their smaller suppliers is rife and continues to put smaller firms at risk. [Approximately] 50,000 small firms a year are forced to close their doors because of it,” states a release from FSB.

“We cannot afford to have these crucial reforms lost at the last fence, as attention turns to the leadership contest, a new administration and the upcoming Brexit deadline,” said Mike Cherry, FSB national chairman, in the release.

South Africa is also searching for prompt payments for SMEs. “Small businesses need predictable cash flow to gain traction, pay their employees, market their products and services, and invest in their businesses,” said Bernard Swanepoel, Small Business Institute executive director, in a release. “One of the surest ways to disrupt it is to delay paying them for their services.”

Payment delays in South Africa are increasing, mostly due to cash flow issues, according to FCIB’s March 2018 International Credit & Collections Survey. Payment delays more than doubled from July 2016 to March 2018, according to respondents. Several creditors advised to accept prepayments when selling into South Africa.

The uncertainty in the U.K. is also contributing to payment delays, increasing nearly threefold. One in four FCIB survey respondents in March 2019 reported an increase in payment delays compared to 9% in the previous U.K. survey from April 2018. While it is easy to sell into the U.K., said one respondent, Brexit is causing a slowdown. “Be aware of Brexit challenges that may arise in the near future,” said another.

“It is crunch time—small businesses want these reforms in place before the prime minister leaves Number 10. Taking real action to tackle poor payment practices can be the legacy that the prime minister and her government leave office with,” concluded Cherry.

Survey: More Corporates Using Fintechs for B2B Payments

Across the business-to-business (B2B) payments landscape, partnering with fintechs will be the strategy of choice for a majority of banks and a growing number of corporates, according to the 2019 B2B Payments and Working Capital Management Strategies Survey.

The survey, conducted by Bottomline Technologies and Strategic Treasure, finds that three in four banks (76%) are either looking to leverage fintech solutions as much as possible for payment-related services and solutions, or are doing so to deliver select niche capabilities to specific customer segments.

Related to this, 28% of corporates indicated that they use a nonbank provider for payments currently, and nearly one in three corporates (32%) plan to expand their use of fintech payment solutions within the next three years. In the same B2B payments study conducted two years ago, less than one in five corporates were using nonbank payment solutions.

The survey concludes that these findings underscore the growing acknowledgement of fintechs’ ability to deliver best-of-breed payment capabilities, and the increased opportunity for banks to partner with these providers to meet client demand across all aspects of B2B payments.

According to the survey, there is variation in which aspect of B2B payments businesses focus on depending on their size. Small companies are twice as likely to focus on accounts receivable (AR) initiatives compared to their larger peers, which are more likely to focus on payables. For organizations of all sizes, top areas of remaining inefficiency across treasury, accounts payable (AP) and AR include cash forecasting, invoice processing and payment receipt and reconciliation. 

The changing payments technology landscape continues to remain a focus for banks and corporates, with additional findings including:

• Faster and emerging payments are gaining traction, as nearly half of corporates are using or interested in using new payment services. Among these new payment services, the top focus is real-time payments (55%), followed by same-day ACH (44%) and blockchain-based networks (35%).
• Both banks and corporates agree that Application of Programming Interface (APIs) are the technology that will have the biggest impact on the B2B payments landscape over the next two to three years. 
• Thirteen times more corporates indicate their comfort level with mobile payments has improved vs. deteriorated over the past year, highlighting a consistent trend of rising comfort.

The report also found that payments security continues to be top of mind, with treasury indicating that fraud is their top payments-related challenge and AP representing the source of the majority of fraud losses. Data show AP suffers a loss from payments fraud three times more frequently than any other department. This may stem in part from the difficulty AP faces when managing and updating vendor bank account details, with 55% of respondents indicating this is their top AP pain point.

As organizations continue to make the transition from fraud-prone paper checks and manual vendor bank account management to electronic payment networks managed by fintechs, there is significant opportunity to mitigate payment fraud risk and reduce losses, the survey states.

The third annual 2019 B2B Payments Survey polled more than 300 financial professionals from companies of all sizes and industries spanning both North America and Europe. The survey was conducted from January to March of 2019.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations